Virtually all economists agree that a massive economic stimulus package is necessary to prevent one of the most severe recessions (and potentially depressions) since the Great Depression of the 1930s. However, the $800 billion stimulus bill working its way through Congress is fatally flawed.
This battle must be won on two fronts. First, we must fix the root of the problem, which is the housing crisis. And second, we must stimulate spending which accounts for 2/3 of the US economic output.
The challenge with the current bill is that it spreads out the money over too many areas without addressing these two core investments. There is but a small amount pledged to help homeowners (which does help address the root but insufficiently). At the same time, there is a massive amount of spending to bail out the states, but that money isn’t going to into incremental programs that would stimulate the economy. It’ll just help plug the massive state deficits without any incremental spending there.
Additionally, there are massive tax breaks spread across broad income brackets. That’s frankly just a massive waste of money. Do you really think someone is going to go out and have the confidence to start spending again because they have an extra $20 in their paycheck every 2 weeks? That’s just absurd.
Rather, the stimulus spending should be solely on getting unemployment down or extending benefits for unemployed:
- People without jobs are not going to spend (obviously).
- People collecting unemployment will spend since they have no choice. That helps the economy, but it’s not sustainable long term.
- People who get a new job created through government spending will not only create value for society through product work, but they will then have the confidence to spend their earnings and even finance some of their spending (an American pastime).
- People who already have jobs will feel more confident to spend more when the labor market tightens. That’s because (1) they will feel it is less likely they will lose their current job, and (2) they will feel even if they do lose their current job there are others out there.
It’s all about confidence and pragmatism. Fix the underlying cause, and get people working over the next 2 years.
Tax cuts are great and can stimulate long term growth. But in the short term, it’s all about targeted programs to get people back to work.